Urban Edge Properties — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Urban Edge is a retail REIT focused primarily on the New York metropolitan area. Its portfolio comprised 73 shopping centers, four malls and a warehouse park, totaling approximately 15.0 million square feet. The Operating Partnership owns substantially all assets and conducts the business; Urban Edge held approximately 95.4% of it at quarter-end.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $91.2m | $112.2m | $291.7m | $313.2m |
| Net income | $56.7m | $26.9m | $112.7m | $109.7m |
| Net income attributable to common shareholders | $54.0m | $24.2m | $106.1m | $98.6m |
| Diluted EPS | $0.45 | $0.21 | $0.89 | $0.86 |
| FFO applicable to diluted common shareholders | $38.2m | $46.3m | $132.4m | $130.0m |
| Cash NOI | $57.4m | $50.9m | $176.9m | $165.5m |
| Same-property cash NOI | $52.1m | $53.6m | $150.9m | $153.7m |
Revenue declined 18.7% in Q3 and 6.9% year to date. Same-property cash NOI fell 2.7% for Q3 and 1.9% for the nine-month period. Cash NOI and FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $115.6m, up from $88.1m. Investing activities provided $60.1m, compared with $36.7m used in the prior-year period; financing activities used $96.8m versus $86.6m.
- Cash and restricted cash totaled $536.3m at September 30, including $441.6m of cash and cash equivalents and $94.8m of restricted cash. Capital expenditures were $71.0m for the nine months.
- Mortgages payable were $1.558bn gross ($1.547bn net of issuance costs); mortgage debt’s weighted-average rate was 4.09%. There was $169.5m of variable-rate mortgage debt. Lease liabilities were $81.4m.
- The $600m revolving credit facility was undrawn and available. Its maturity was extended to January 29, 2024, with two six-month extension options. The company reported compliance with debt covenants and no debt maturities in 2019 or 2020.
- Management said cash from operations, cash on hand, the revolver and access to capital markets should be sufficient over the next 12 months for operations, debt service and capital expenditures. The Board declared $0.22 per share/unit for each of the first three quarters; the stated annual rate was $0.88.
Material changes and unusual items
- Q3 net income rose substantially, despite lower revenue, primarily because the company recognized a $39.7m gain from selling six properties, compared with $2.2m of real estate sale gains in Q3 2018. It also recorded a $1.8m gain from selling a ground-lease position.
- Nine-month real estate sale gains were $68.2m, versus $52.6m in 2018. These gains supported GAAP earnings; Q3 FFO was lower year over year.
- Nine-month results included $22.7m of real estate impairment charges on three properties, partly offset by $13.6m of insurance recoveries related to Hurricane Maria and tornado damage, resulting in a $9.1m net casualty and impairment loss.
- Revenue comparisons were affected by prior-year write-offs of below-market lease liabilities and lease termination income, property dispositions, lease changes and the treatment of credit losses under the new lease standard. The 2018 period also included Toys “R” Us lease termination payments that reduced operating cash flow comparisons.
- Adoption of ASC 842 on January 1, 2019 resulted in $83.5m of right-of-use assets and $81.4m of lease liabilities at quarter-end, and a $2.9m cumulative adjustment to accumulated deficit. Comparative periods were not restated.
- No acquisitions closed during the nine months. Pending, contingent acquisitions included a Maywood, NJ office building/ground-lease interest for $7.1m, a Bergen Town Center outparcel for $6.6m and a Boston-area property for $24.5m. The company expected to use disposition proceeds for these 1031 exchanges.
Outlook, risks and contingencies
The company reported approximately $42.5m of active development, redevelopment and anchor-repositioning projects, with $8.3m remaining to be funded over the next two years. It completed five redevelopment projects during Q3. No formal earnings or NOI guidance is provided in the filing.
Management identifies e-commerce, tenant bankruptcies, economic and real-estate market conditions, property-area weakness, natural disasters, project costs and leasing outcomes, financing availability, competition for acquisitions, and REIT qualification as risks. Sears/Kmart rejected two leases representing part of four Kmart locations that had generated $8.5m of annual rent; two other leases were assumed by ESL Investments. Additional Toys “R” Us settlement proceeds, if any, have no determined amount or timing.
Insurance deductibles, uncovered losses and non-reimbursable premiums could be material; the company expects premiums to increase and notes limits and exclusions for certain risks. Environmental remediation accruals were $1.6m, and actual costs could exceed the estimate. Management stated ordinary-course legal matters are not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of reported earnings and cash generation depends on property-sale gains, insurance settlements and other nonrecurring items.
- Drivers of declining same-property cash NOI and whether tenant occupancy, rents and collections are stabilizing.
- Progress, leasing and funding needs for redevelopment projects and the pending acquisitions, including closing conditions and 1031-exchange timing.
- Debt maturity and refinancing exposure, variable-rate sensitivity, and continued availability and covenant compliance under the revolver.
- Exposure to bankruptcies, uninsured property losses, environmental remediation costs and the sustainability of the dividend relative to recurring cash flows.